Netflix strikes paid connection deal with AT&T

Netflix has struck a paid data connection deal with another one of its supposed antagonists.

The company announced Tuesday that it had agreed to pay AT&T for a direct connection between the two companies’ networks. The companies struck the deal back in May and have been working since then to connect their networks.

“We’re now beginning to turn up the connections, a process that should be complete in the coming days,” company spokeswoman Anne Marie Squeo said in a statement. An AT&T representative confirmed the arrangement.

The agreement ends a standoff between the two companies. AT&T had been pressing Netflix to pay for an upgraded connection between their networks since at least March.

Internet traffic flows between different networks generally in one of two ways, through transit, in which a smaller network passes its traffic through a larger one to connect to the broader Internet; and peering, in which large networks connect with each other. Traditionally, smaller networks paid larger ones for transit services, but peering didn’t require any kind of payment from one company to another. Instead, both networks bore their own costs of interconnecting.

In recent years, big Web content companies including Netflix have begun to account for a large and growing portion of Internet traffic. In order to pass that ever-growing amount of data on to consumers without creating a bottleneck, the connections between those companies and Internet service providers (ISP) such as AT&T have had to be upgraded. Unlike past arrangements, the Internet service providers have balked at upgrading those connections on their own dimes and have instead demanded payment from Netflix and other big Internet companies.

Netflix has protested the move to these so-called “paid peering” arrangements. The company has noted that it is sending to ISPs’ customers only the data they are demanding in the form of streamed movies. And it has argued that the only reason ISPs can demand to be paid for peering is because of the limited competition for broadband access; if AT&T were to block or throttle Netflix, many of its customers would have no other place to turn for Internet access. The company has called on the Federal Communications Commission to ban paid peering arrangements as part of a broader move to curb ISP practices as part of a new, stronger net neutrality policy.

Despite its protests, Netflix has now announced three paid peering relationships. Earlier this year, it inked deals with both Verizon and Comcast.

Netflix has its marginal margin squized again. Skyrocketing content price, multiple ISP payment. International expansion and still Netflix is selling $20 for $19 when will Netflix be profitable? Never?